Haynesville Shale Basics for the Newbies out there

Since this site has gotten so big and there are so many newbies on here, I thought I would do a little basics outline for folks this time. Let me prefice this by saying that leasing has slowed to a crawl at this point and Chesapeake is backing out of many deals in areas they do not hold the majority. That said, I do think the market will stabalize and the leasing activity will ebb and flow for the next several years so information about drilling and leasing is still relevant. I hope this helps get some of you started in your quest for knowledge. Kassi

The Haynesville Shale and Mineral Leasing: What Every Land Owner Needs to Know
What is the Haynesville Shale?
• Unconventional gas deposit
– Methane gas located in hard “shale” rock instead of porous rock formations.
– Between 10,500 and 17,500 ft deep
– Reported by Chesapeake CEO as being one of the “4 largest natural gas deposits in the world”
– Extends from NW LA to E TX
Parishes Impacted
• Boarders not currently definitively defined
• All of: Desoto, Jackson, Red River, Bienville
• Southern: Caddo, Bossier, Webster, Claiborne, Lincoln, Caldwell
• Northern: Sabine, Natchitoches, Winn
Drilling Basics
• Usually takes 20-30 days, 24 hrs/7 days
• Completion rig put into place
• Frac trucks complete the fracturing process (takes about a week)
• Well head is installed (Christmas Tree) along with storage tanks

Drilling Basics
• Drilling & fracing processes are very loud
• Noise abatement (sound barriers and sound blankets) help reduce noise.
• 4-5 million gallons of water per day, per well for drilling & fracing process.
• Only 5%-10% of water used can be recycled
Drilling Basics
• Drilling mud: Combo of fresh water, bentonite clay, barium sulfate & calcium carbonate
• Disposed of by separating solids from water
– Solids mixed with the land surface & must not be able to migrate to other land surfaces
– Salt water goes in injection wells
More Drilling Basics
• Water used for fracing must be disposed of in deep formations in wells regulated by state and federal agencies due to potentially hazardous waste products
• Naturally occurring radioactive material: NORM: can build up in well piping, storage tanks & other surfice equipment.
Drilling: Potential Problems
• Air Pollution from Diesel engines
• Improperly drilled or cased wells or corroded casing can serve as pathways for contamination of aquifers
• Oil based muds commonly used for high pressure shales or during directional drilling. Oil contaminated cuttings contain hazardous chemicals
• Muds usually contain bentonite clay: very expansive soil. Common practice to dispose of drilling mud either by burying the reserve pit or discharge the mud to the surface
• If building on a former drill site you must remove all unstable and toxic materials & fill the pit with compacted materials to qualify for FHA mortgage insurance.
• Soaps and other substances sometimes used to remove drill cuttings may migrate from the borehole into the ground water zone that supplies private wells.
• Well blowouts: can completely destroy rigs and surrounding homes may have to be evacuated

Drilling: The Land Owner Should
• Negotiate protections in their lease such as:
– Use of noise abatement technology
– Testing of water wells prior to beginning of drilling activity or stipulation that the quality and quantity of water is adequate.
– Payment for repair or replacement of water sources/wells if damaged
– Payment for surface damages (take “before” pictures of the land/homes)
• Negotiate protections in their lease such as:
– Re-contouring and re-seeding the land
– Minimum distance from inhabited dwellings for wells
– Noise abatement technology and low pollution equipment
– Off site disposal of waste products from drilling

Seismic Exploration
• By blasting dynamite from a hole drilled several hundred ft in the ground OR
• By dropping a heavy wt from a truck (thumper truck) on hard ground such as paved roads
• By shaking the ground with a vibrasizer
Seismic Exploration: Potential Problems
• Seismic lines destroy vegetation & may cause erosion
• 3-D tests –cause greater surface disturbance than 2-D tests
• Dynamite “shot holes” may intercept the water table & water may begin to flow or seep to the surface.
• Can cause water wells to become “dirty”
Seismic Exploration: The Land Owner Should
• Ask Co. to avoid steep slopes, surface water areas & any ecological sensitivity areas
• Negotiate more payment and stronger surface damage provisions if 3-D testing is done
• Get water wells tested before Seismic testing is done
• Review state regulations and ensure the Co. follows them
Legal Issues
• Community Property: Both spouses must sign the lease
• Co-owned land: Must have 80% ownership to lease without the other owners but “every effort” must be made to contact and contract with the other owner(s)
• If no drilling for 10 years minerals revert to surface owner
Legal Issues: Force Pooling
• Typically 640 acres based on section lines
• Land owners must be notified & hearing held (typically in Baton Rouge)
• Costs taken out of production
• The “risk charge” of 200% of expenses does not apply to unleased interest not subject to an oil, gas, and mineral lease
Lease Details
• Never sign a standard lease!
• Minerals: Limit lease to petroleum and natural gas and related hydrocarbons only except coal, lignite and uranium.
• Negotiate the best possible bonus payment and try to stick to a 3 year primary term only
• Minimum royalty should be 25%
• Ask for a “no cost” royalty
• Royalty payments should begin within 120 days of production in paying quantities
• Stipulate what constitutes timely payment and what penalties will result from late payment.
• Royalty payments should be based on price of gas at the casinghead or market price.
• Stipulate a minimum royalty per acre per year or define production in paying quantities.
• Shut in provision should include:
– Monthly or annual payment during shut in
– Time limit on shut in
• Allow for reasonable time in the event of a force majeure but stipulate what constitutes a force majeure
• Request removal of any liability of warranty on the title
• Include an indemnification clause
• Include a vertical Pugh clause i.e.: you retain depths from 100 ft below the deepest formation produced by the production company in the Haynesville shale
• Request horizontal Pugh clause
• Do not allow clauses that allow units larger than 640 acres without state approval
• Include a clause allowing you or your agent reasonable access to the Company’s books
• Request horizontal Pugh clause
• Do not allow clauses that allow units larger than 640 acres without state approval
• Include a clause allowing you or your agent reasonable access to the Company’s books
* Request strongly worded water protection including testing of wells if you utilize well water
• Negotiate surface rights separately
• Limit proximity of wells and storage tanks to inhabited dwellings
• Include payment for all surface damages

How do I get what I need?
• Organize your section/neighborhood
• Collectively bargain
• Ensure person negotiating for the group has adequate knowledge, business sense and negotiating skills
• Do not sign anything without reading it and understanding it.
• Pay for representation if necessary
• Be patient, time is on your side
• Research and educate yourself
• Never allow yourself to be pressured into anything
Where do I begin to organize?
• Get a map of your section including property owners from the tax assessors office
• Get in touch with people in your section
• Communicate, Communicate, Communicate
• Hire help if needed
• Watch out for the elderly
Most important advice!
• Remember this is a long term business deal. It may last longer than many marriages!
• The O&G Companies are not evil but they are smart business people. Insist on being treated as a business partner.
• Do not go into mineral leasing lightly, read, ask questions, get help if needed to be sure the best possible lease is negotiated for you.

Needed Mineral Code Changes: Contact your state represenative and ask for:
• Mandatory Horizontal Pugh Clause
• Separation of Mineral Leasing from Surface Leasing
• Requirement for Disclosure of Activity
• Three Day Waiting Period
• Discussion & Lease in Native Language

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Comment by Sheila C on October 23, 2008 at 1:47pm
Kassi:

As always, you are thorough and concise! Thank you for your posts and vast knowledge!

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